OVERALL ECONOMY

Sentiment and spending

2025 was widely anticipated to be a subdued year, yet persistent inflation and ongoing economic headwinds dampened expectations further. As we look ahead, the key question remains: what sentiment will shape the markets in 2026?

At the end of 2025, the Organisation for Economic Co-operation and Development (OECD) expected UK GDP growth to improve to 1.7 percent, following an almost stagnant 2024, caused by inflationary pressures and low demand. However, in September 2025, it lowered its growth forecast for this year to 1.4 percent, and left 2026 unchanged at 1.0 percent. It expects a tighter fiscal stance, higher trade costs, and ongoing uncertainty to weigh on both external and domestic demand. Within the London real estate market, the question is whether this has created a drag on construction and impacted prices.

CPI

Sticky inflation

Consumer price inflation (CPI) experienced unexpected increases in 2025, a reversal of the trend of easing inflation that was seen in 2024. In 2025, CPI breached 3.0 percent, moving further away from the Bank of England’s target of 2.0 percent, and peaked at 3.8 percent in the twelve months to August 2025. The primary drivers of this upward pressure were rising costs in restaurants, hotels, and food. Economists surveyed by the Treasury in September 2025 expect inflation to average 3.6 percent in Q4 2025, following its peak in September.

The Governor of the Bank of England suggested that much of this upward pressure can be attributed to food prices and “administered prices,” which are directly influenced by government policy or regulators, such as water bills or Vehicle Excise Duty, as well as National Insurance.

On a global scale, food prices remain a significant cause for concern and are expected to continue exerting pressure on inflation. The UN Food and Agriculture Organisation’s index of world food prices reported a global increase of 8.0 percent in the year to August 2025, which will impact the general rate of inflation.

Despite this sticky inflation, the Bank of England has cut interest rates three times this year. The Monetary Policy Committee’s August minutes suggest the increase in inflation is temporary and that it will return to the 2.0 percent target by 2027 as reduced wage pressures contribute to lower inflation in services. If the economy evolves as expected, the Bank will be able to reduce rates further.

LABOUR

The wider labour market is softening

Generally, the UK labour market has softened. Wage growth has started to decelerate, and job vacancies have decreased, suggesting hesitance to recruit new staff (Figure 1). The unemployment rate has risen, surpassing last year’s forecasts. Crucially, the ratio of unemployed people per job has increased from 1.7 a year ago to 2.4 in Q3 2025. Companies’ profits have been impacted by several factors: the increase in the minimum wage, changes to the employers’ National Insurance Contributions, and new measures introduced in the Employment Rights Bill.

While challenges exist, the outlook for the overall market may not be as bleak as it appears. Current wage growth continues to outpace consumer price inflation, and the employment rate has improved as the economic inactivity rate for people aged 16-64 has fallen by more than expected.

Most economic analysts expect businesses to adjust to the new cost levels and the market to stabilise.

SENTIMENT

Consumer and investor sentiment

The warmest summer in the UK’s recorded history, combined with falling interest rates, boosted retail sales. The British Retail Consortium found that year-on-year sales in August rose by 3.1 percent, surpassing the monthly average of 2.0 percent. Total non-food sales grew by 1.8 percent, marking a notable shift from the 2.8 percent decline seen in the same period in 2024. Surveys on consumer sentiment typically indicate that most people feel financially secure at present but are concerned about a deteriorating economic outlook.

Businesses and investors share a similar outlook to consumers. The Q3 2025 Business Confidence Monitor published by the Institute of Chartered Accountants in England and Wales showed an increasing caution among businesses, driven by elevated concerns over tax burdens and above-average inflation. Respondents reported that capital investment levels had eased and fallen below the historical average. The survey revealed that sentiment fell in most sectors, but most significantly in property, whilst energy, water, and mining were the most confident.

SPENDING

Government spending

This year marked the government’s first multi-year Spending Review since 2021. It established departmental budgets extending to 2028/29, along with capital spending plans to 2029/30, with the intention of leveraging spending to capitalise on growth.

The Spending Review placed a significant focus on infrastructure and decarbonisation schemes. Alongside a 10-year Industrial Strategy, there is an increased emphasis on long-term planning and pipeline visibility. For construction, the National Infrastructure and Service Transformation Authority (NISTA) has brought together strategic oversight and delivery of infrastructure projects.

It is hoped that this spending will enhance long-term economic, social, and environmental resilience. This investment aims to attract private finance into underserved or unfunded areas of the economy, thereby fostering long-term confidence.

However, there are concerns about the potential for spending limitations as the UK’s economy struggles amid ongoing international headwinds. Additionally, there have been challenges in achieving departmental savings, which means many are eagerly awaiting this year's Autumn Statement for any updates to spending or taxation.